"Over the years, I've often been asked for investment advice, and in the process of answering I've learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund,"

-Warren Buffett

There is a whole industry dedicated to increasing people’s height with pills. It's as scammy as you think it would be.

But I think back to when I played basketball. Back in ninth grade, basketball was my life. The problem? I was only 5'3". I needed to grow and I didn’t know much about what made people grow taller. Had I known about height pills, there’s a non-zero chance I might have fallen for them.

If I had bought ‘height pills’, I'd be out money. At worst, I would actually hinder my attempts to grow or even compromise my health.

So what do scammy placebo pills have to do with investing?

While most of us realize the stupidity of wasting money on something as pointless as height pills, this is exactly what most people do with their investing.

The difference is that with the pills we’ll be out a few hundred bucks. With our retirement accounts, it means losing out on hundreds of thousands of dollars over your lifetime.

In the investing world, these expensive placebos are called:

Mutual fund managers
Mutual fund fees

This usually costs investors far more than they understand. This happens because otherwise smart people lack a few simple concepts.

In this post, we’ll:

Take a whirlwind tour of what investing is
Recommend a single, practical action to give you maximum returns with almost no effort.
- This action will allow you to retire with way more money in your pocket. If you’re young enough, this will most likely make you an automatic multimillionaire.

Investing Lessons from 20th Century

Back in the late 1800s, stocks became a thing. For the first time, average proletariat Joes could easily become capitalists, owning shares in massive, powerful companies for just a few dollars.

Stocks

A stock is part-ownership in a company. If you buy a share of Ford, you own a small sliver of their factories, the cars in stock, their intellectual property - and most importantly, you are entitled to your share of their profit, called a dividend.

Sounds pretty good, right? It is. That's why people are willing to pay for shares of Ford - about $18/share at the time of this writing.

As the company gets more productive and population grows (so there’s more people to sell to), the dividends get bigger and the price of the stock goes up.

The problem with individual stocks is that they were (and are) risky. A company can blow up 10x - or they can just blow up - to zero.

The question "What's a good stock to buy and at what price?" is hugely complex - and futile, as we'll see.

Mutual Funds

To solve the problem of concentrated risk, investment companies came up with a great idea in the 1920s. What if a bunch of investors got together to "mutually fund" the purchase of a wide number of stocks? It would allow ordinary people to get the gains of the stock market while spreading the risk over hundreds of companies instead of just one. The mutual fund was born.

The companies would then put an expert "fund manager" in charge of the picking, buying and selling the best stocks for the fund so Joe Schmoe investors could participate without having to know anything about investing and still profit.

Even though significant fees were involved to pay the fund manager and package the investment, the mutual fund was a huge step forward for the average investor.

Pointless Millionaires

Things progressed this way for a long time, with many people benefitting - particularly the fund managers. But in the middle of the century, some astute researchers started to notice something that was as unexpected as it was important.

Incredibly, they noticed that no fund or fund manager was regularly beating the market. For all the time and effort that smart, Harvard-educated Wall Street fund managers put in, they couldn’t pick stocks that were better than a simple average of the big companies in America (S&P 500).

Sure, on a given year, some beat the “index” - but most didn’t. And the ones that did beat the index quickly became the ones that didn’t. The ability of a fund to beat the simple average of the market was random.

In other words, all the billions of dollars in fees paid were a complete waste of money.

You read that right. Throwing darts at the "Stock" section of the Wall Street Journal will produce the same result over time as hotshot fund managers, even with the help of legions of analysts, corporate middlemen and brick and mortar locations on the most expensive island in the world (Manhattan).

This was a watershed moment - or it should have been.

These findings raised a question - THE question: "Why are we paying them so much then?"

The rational (and ethical) action for investment companies to take was to inform the public that their fees were pointless, shutter their doors, and turn off their personal trillion dollar firehoses that were making them the richest people to ever walk planet earth.

They promptly made the tough call to fire their fund managers and return the money back to the investors.

Wall Street firms changed nothing. They kept offering their funds, complete with hefty fees, and almost no one was the wiser. They’ve done it for decades and continue to this day.

Index Funds

Back in the seventies, one man decided to do the right thing. His name was Jack Bogle. In 1975, Bogle started a company called Vanguard. Bogle put into practice what we now know about the inability of even the smartest people to pick stocks.

*Bogle took pride in not being a billionaire*

Instead of hiring a hotshot manager with a team of expensive analysts, he replaced the traditional fund manager with a set of rules: "Own the 500 largest companies in America". Instead of paying someone to try and beat the market, he set out to be the market, providing the historical 8% returns without any of the expensive fees. When you include fees in the return, this new “passive” fund crushed other actively managed funds over time.

The rules made sure that its investors were invested in the most successful companies in the world without the downside risks of individual stocks. The best part was that the "rules" managing the fund didn't require a 200-foot yacht or a 4-story penthouse in the upper east-side.

His miniscule fee was just enough to pay his salary and run his office in Pennsylvania. The savings he gave back to the investor.

By doing this, he effectively passed over tremendous personal wealth as another hotshot fund manager, instead transferring trillions back to investors.

This is why Bogle has been called the greatest undercover philanthropist of all time and the index fund as sitting alongside “the invention of the wheel, the alphabet, Gutenberg printing press and wine and cheese.”

Crazy story, right? What does it mean for you?

Put it Into Practice

For most people (who don’t want the higher-work and higher-returns of rental properties), a Vanguard S&P index fund should be where you put your money. It turns out that all the findings of the last century can be applied with one simple action:

Buy as much VTI as you can in a tax-advantaged account and leave it there as long as you can.

VTI is Vanguard’s flagship total market index fund. You can go to vanguard and set up an account right now. Even better, set it to auto-invest 15% of your paycheck or so to ensure future millionaire status. Mix in some bonds (30-40%) close to retirement.

The arguments for this simple strategy have been borne out over much data, research and time. See:

Simple Path to Wealth (Book by JL Collins)
Little Common Sense Book on Investing (Short book by Jack Bogle himself)
How to Make Money in the Stock Market (Blog post by Mr. Money Mustache)

Just to name a few.

This advice shouldn’t be controversial, but there will always be people in the investing industry who still profit from ignorance. Don’t be surprised to find a few still selling the idea that they or someone they know can beat the market over time - though a few minutes of research will prove them wrong.

Conclusion

Investing has come a long way in the last century, both in our understanding and the products available to the average investor. Index funds have made it extremely easy for people to maximize stock market returns over time.

Way back in ninth grade, I stayed the course. Even while I stayed at 5’3” and people got taller around me, I drank my milk, ate a lot of food and most importantly I didn’t pay some guru promising “extra growth” for a hefty fee. The result? By junior year I had grown an entire foot. By simply taking what my genes gave me I grew more than I thought was possible. We need to do the same with our investing.

Buy index funds, forget the headlines, and let the magic of markets do the rest.

Investing: A Simple Zero-to-Hero Guide